Oil Prices Surge After Katrina forces U.S. Oil Facilities to Close

8-29-05 - Crude-oil futures briefly surged past $70 a barrel for the first time ever as Hurricane Katrina barreled toward the heart of U.S. oil and refinery operations in the Gulf of Mexico on Monday, shutting down an estimated 1 million barrels of refining capacity.

The Category 4 storm advanced on an area crucial to the U.S. energy infrastructure _ offshore oil and gas production, import terminals, pipeline networks and numerous refining operations in the southern states of Louisiana and Mississippi. Oil companies evacuated workers and shut down more than 600,000 barrels of daily production in the Gulf.

After slamming ashore, it charged toward low-lying New Orleans with winds of 145 miles per hour and the threat of an extremely dangerous storm surge.

"This is the big one," said Peter Beutel, an oil analyst with Cameron Hanover. "This is unmitigated, bad news for consumers."

Light, sweet crude for October delivery jumped as much as $4.67 a barrel to hit a high of $70.80 a barrel in electronic trading on the New York Mercantile Exchange, before slipping back to $69.71 by afternoon in Europe. That was still up $3.58 from its close on Friday in New York.

Gasoline traded at $2.1275 a gallon, up 20 cents, or 12 percent, while heating oil rose by more than 12 cents to $1.9587 a gallon.

Brent crude was not trading Monday, with London's International Petroleum Exchange closed for a bank holiday.

Hurricane Katrina threatened a 28-foot storm surge, forcing a mandatory evacuation of the below-sea-level New Orleans.

Katrina has already forced the shutdown of an estimated 1 million barrels of refining capacity and curbed offshore production, but analysts said the storm's potential damage to facilities was even more worrying.

"It's not only the suspension of production that's causing concern, it's the fact that we could see potential damage to the platforms, which would cause longer disruptions to production," said energy analyst Victor Shum of Texas-headquartered Purvin & Gertz in Singapore.

The Gulf of Mexico normally produces 1.5 million barrels of crude oil a day, or about a quarter of the United States' domestic output, according to the U.S. Mineral Management Service.

"It looks like the perfect storm to drive prices up," Shum said.

Katrina quickly grew from a smallish storm threatening Florida into a menacing hurricane in just a few days.

On Friday, the Nymex crude oil contract fell more than a dollar to $66.13 a barrel as many traders took profits on forecasts that Katrina would likely have little impact on U.S. refineries and production facilities in the Gulf of Mexico.

"But then the storm reloaded over the weekend, gained strength and set on a path toward the oil facilities," Shum said. "The people who sold on Friday are probably kicking themselves now."

Unlike last year's Hurricane Ivan, which only hit the edge of the oil and natural-gas producing areas in the central Gulf of Mexico, Katrina is plowing right through the heart of that region.

"If this thing knocks out significant quantities of refining capacity ... we're going to be in deep, dark trouble," said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.

PVM Oil Associates in Vienna, Austria, said Katrina had the potential to do more damage to southeastern Louisiana than Ivan, which damaged seven platforms, 100 underwater pipelines and shut down production at some facilities for several months.

Some analysts have said the only way to rein in surging prices would be for the United States to tap some of its petroleum reserves.

"President Bush could announce a release of supply from the Strategic Petroleum Reserve," said commodity strategist David Thurtell of Commonwealth Bank of Australia in Sydney. "(That's) the only thing that will prevent further significant price rises from here."

The Bush administration has said the petroleum reserves should be tapped only when there are disruptions of oil imports from overseas.

The Louisiana Offshore Oil Port, the largest oil import terminal in the United States, evacuated all workers and stopped unloading ships on Saturday.

ChevronTexaco Corp. evacuated all workers in the eastern and central Gulf of Mexico and nonessential workers in the western Gulf late Saturday, but company spokesman Matt Carmichael said Chevron will continue to produce 90 percent of its normal production by remote.

Shell estimated 420,000 barrels of oil and 1.35 million cubic feet of gas per day will be shut in at its central and eastern Gulf facilities. ExxonMobil said it has ceased daily production of 3,000 barrels of oil and 50 million cubic feet of gas.

French oil company Total SA said Monday it has joined the growing list of producers to evacuate from Katrina. Staff began leaving Friday, said Total spokesman Paul Floren.

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